Paper title links go to working papers. Journal title links go to journal articles.
Phase Out Tariffs, Phase In Trade?, with Tibor Besedes (Georgia Tech) and Tristan Kohl (U of Groningen).
Journal of International Economics, 2020, November, 103385.
Tariff phase-out cannot explain the delayed increase in trade flows typically observed after FTA formation. Abstract
An important stylized fact in the empirical Free Trade Agreement (FTA) literature is that member trade flows gradually increase over time following an FTA. Baier & Bergstrand (2007) suggest
two explanations: tariff phase-out and delayed pass-through of tariffs into import prices. We examine these hypotheses using 1989--2016 U.S. import growth and product-level data on the tariff
phase-out negotiated under NAFTA and the earlier Canada-U.S. FTA. We do not find evidence supporting either hypothesis. While products receiving tariff cuts do show delayed import growth relative
to products with unchanged tariffs, the delay in import growth does not correspond to delays in the timing of tariff cuts. We also show that tariff cuts are fully and immediately passed through
to U.S. importers as there are virtually no changes in the prices received by exporters either in the short run or the long run. Rather, we find evidence for an important role played by NAFTA
tariff cuts reducing the impact of frictions that, in turn, allow for a spatial expansion of imports across the U.S. Read more »
Tariff bindings and the dynamic formation of Preferential Trade Agreements, with Moise Nken (Ryerson) and Halis M. Yildiz (Ryerson).
Journal of International Economics, 2020, January, 103279.
Tariff binding liberalization has substantial impacts on the nature and extent of PTA formation. Abstract
We show that multilateral tariff binding liberalization substantially impacts the nature and extent of Preferential Trade Agreement (PTA) formation. First, it shapes the nature of forces constraining expansion of Free Trade Agreements (FTAs). The constraining force is a free riding incentive of FTA non-members under relatively high bindings but an exclusion incentive of FTA members under relatively low bindings. Second, multilateral tariff binding liberalization shapes the role played by PTAs in the attainment of global free trade. Initially, tariff binding liberalization leads to Custom Union (CU) formation in equilibrium but in a way that undermines the pursuit of global free trade. However, further tariff binding liberalization leads to FTA formation in equilibrium and in a way that facilitates the attainment of global free trade. Our theoretical analysis also has implications regarding recent empirical discussions over the relative merits of FTAs versus CUs. Read more »
Preferential Trade Agreements: Recent theoretical and empirical developments, with Pravin Krishna (Johns Hopkins). Oxford Research Encyclopedia of Economics & Finance, 2019.
A survey of recent game theoretic and empirical developments in the PTA literature. Abstract
In recent decades, there has been a dramatic proliferation of preferential trade agreements (PTAs) between countries that, while legal, contradict the non-discrimination principle of the world trade system. This raises various issues, both theoretical and empirical, regarding the evolution of trade policy within the world trade system and the welfare implications for PTA members and non-members. The survey starts with the Kemp-Wan-Ohyama and Panagariya-Krishna analyses in the literature that theoretically show PTAs can always be constructed so that they (weakly) increase the welfare of members and non-members. Considerable attention is then devoted to recent developments on the interaction between PTAs and multilateral trade liberalization, focusing on two key incentives: an “exclusion incentive” of PTA members and a “free riding incentive” of PTA non-members. While the baseline presumption one should have in mind is that these incentives lead PTAs to inhibit the ultimate degree of global trade liberalization, this presumption can be overturned when dynamic considerations are taken into account or when countries can negotiate the degree of multilateral liberalization rather than facing a binary choice over global free trade. Promising areas for pushing this theoretical literature forward include the growing use of quantitative trade models, incorporating rules of origin and global value chains, modeling the issues surrounding “mega-regional” agreements, and modelling the possibility of exit from PTAs. Empirical evidence in the literature is mixed regarding whether PTAs lead to trade diversion or trade creation, whether PTAs have significant adverse effects on non-member terms-of-trade, whether PTAs lead members to lower external tariffs on non-members, and the role of PTAs in facilitating deep integration among members. Read more »
Dynamic formation of Preferential Trade Agreements: The role of flexibility. Canadian Journal of Economics, 2019, 52(1), 132-177.
Earlier versions of this paper circulated under title of "Why don’t more countries form customs unions instead of free trade agreements? The role of flexibility"
A trade–off between coordination and flexibility can explain why, in practice, the number of Free Trade Agreements overwhelmingly outweigh the number of Customs Unions. Abstract
In practice, Free Trade Agreements (FTAs) outnumber Customs Unions (CUs) by a ratio of 9:1. Nevertheless, the literature traditionally views CUs as optimal for members because CU members coordinate external tariffs. I show that a dynamic FTA flexibility benefit can help explain the prevalence of FTAs: individual FTA members have the flexibility to form their own future FTAs whereas CU members must jointly engage in future CU formation. Under asymmetry, even arbitrarily small degrees thereof, FTAs emerge in equilibrium if and only if the FTA flexibility benefit outweighs the CU coordination benefit. Read more »
Are global trade negotiations behind a fragmented world of "gated globalization"?, with Santanu Roy (Southern Methodist University). Journal of International Economics, 2017, 108, 117-136.
Global tariff negotiations can prevent global free trade precisely because they are successful in lowering global tariffs. Abstract
We show that global trade negotiations can prevent global free trade. In a simple model where global tariff negotiations precede sequential Free Trade Agreement (FTA), we show FTA formation can expand all the way to global free trade in the absence of global tariff negotiations but global free trade never emerges when global tariff negotiations precede FTA formation. This result arises precisely because global tariff negotiations successfully elicit concessions from negotiating countries. Moreover, global tariff negotiations can produce a fragmented world of "gated globalization" where some countries form FTAs eliminating tariff barriers among themselves while outsiders continue facing higher tariffs. Read more »
Free Trade Agreements as dynamic farsighted networks. Economic Inquiry, 2017, 55(1), 31-50.
In the presence of multilateral negotiations, Free Trade Agreements prevent global free trade when there are two larger countries and one smaller country, but Free Trade Agreements are necessary for global free trade when there is one larger country and two smaller countries. Abstract
In the presence of multilateral negotiations, are Free Trade Agreements (FTAs) necessary for, or will they prevent, global free trade? I answer this question using a dynamic farsighted model of network formation among asymmetric countries. Ultimately, FTAs prevent global free trade when there are two larger countries and one smaller country but FTAs can be necessary for global free trade when there are two smaller countries and one larger country. The model provides insights into the dynamics of recent real world negotiations and recent results in the literature on the empirical determinants of trade agreements. Read more »
On the different geographic characteristics of Free Trade Agreements and Customs Unions, with Halis M. Yildiz (Ryerson). Journal of International Economics, 2016, 103, 213-233.
A trade–off between coordination and flexibility can explain why all observed Customs Unions are inter–regional yet Free Trade Agreements are both inter and intra–regional. Abstract
Casual observation reveals a striking phenomenon of Preferential Trade Agreements
(PTAs): while Customs Unions (CUs) are only intra-regional, Free Trade Agreements
(FTAs) are inter and intra-regional. Using a farsighted dynamic model, we endogenize
the equilibrium path of PTAs among two close countries and one far country. Rising
transport costs mitigate the cost of discrimination faced by the far country as a CU
non-member and diminish the value of preferential access as a CU member. Thus,
sufficiently large transport costs imply an FTA is the only type of PTA that can
induce the far country's participation in PTA formation. Unlike CU formation, FTA
formation can induce participation because FTAs provide a flexibility benefit: an FTA
member can form further PTAs with non-members but a CU member must do so
jointly with all existing members. Hence, in equilibrium, CUs are intra-regional while
FTAs are intra- and inter-regional. Read more »
Could tariffs be pro-cyclical?, with Maia Linask (U of Richmond). Journal of International Economics, 2016, 103, 124-146.
Counter to conventional wisdom, we find applied tariffs are pro-cyclical. Abstract
Conventional wisdom says tariffs are counter-cyclical. We analyze the relationship between business cycles and applied tariffs using a disaggregated product-level panel dataset covering 72 countries between 2000 and 2011. Strikingly, and counter to conventional wisdom, we find that tariffs are pro-cyclical. Further investigation reveals this pro-cylicality is driven by the tariff setting behavior of developing countries; tariffs are acyclical in developed countries. We present evidence that pro-cyclical market power drives the pro-cyclicality of tariffs in developing countries, providing further evidence of the importance of terms of trade motivations in explaining trade policy. Read more »
Domestic political competition and pro-cyclical import protection, with Maia Linask (U of Richmond). Review of International Economics, 2016, 24(3) 564-591.
A dynamic theory of domestic political competition that generates pro-cyclical applied tariffs. Abstract
Governments, especially in developing countries, routinely practice binding overhang
(i.e. setting applied tariffs below binding WTO commitments) and frequently
move applied tariffs for given products up and down over the business cycle. Moreover,
applied tariffs are pro-cyclical in developing countries. We explain this phenomenon
using a dynamic theory of lobbying between domestic interest groups. Applied tariffs
are pro-cyclical when high-tariff interests (e.g. import-competing industries) capture
the government: these groups concede lower tariffs to low-tariff interest groups (e.g.
exporting firms or firms using imported inputs) during recessions because recessions
lower the opportunity cost of lobbying and thereby generate stronger lobbying threats. Read more »
An empirical analysis of trade–related redistribution and the political viability of free trade, with Dann Millimet (Southern Methodist University). Journal of International Economics, 2016, 99, 156-178.
Congressmen are more likely to vote for free trade agreements (FTAs) when trade–adjustment assistance is more generous in their district, espeically if their district is particularly vulnerable to the FTA or they face significant re-election risk. Abstract
Even if free trade creates net welfare gains for a country as a whole, the associated distributional implications
can undermine the political viability of free trade. We show that trade-related redistribution -- as presently
constituted -- modestly increases the political viability of free trade in the US. We do so by assessing the
causal effect of expected redistribution associated with the US Trade Adjustment Assistance program on
US Congressional voting behavior on eleven Free Trade Agreements (FTAs) between 2003 and 2011. We find that
a one standard deviation increase in expected redistribution leads to an average increase in the
probability of voting in favor of an FTA of 1.8 percentage points. Although this is a modest impact on average, we find
significant heterogeneities; in particular, the effect is larger when a representative's constituents are more at risk or the
representative faces greater re-election risk. Read more »
Costly distribution and the non–equivalence of tariffs and quotas, with Maia Linask (U of Richmond), Public Choice, 2015, 165(3), 211-238
Cooperative elimination of rent–seeking under quotas is easier to sustain than cooperative elimination of revenue–seeking under tariffs and, in this sense, quotas are welfare superior to tariffs. Abstract
When governments impose a quota or tariff on imports, it is well known that the resulting
rents and revenues trigger costly rent-seeking and revenue-seeking activities, which are welfare-
reducing and may be economically more significant than the efficiency losses resulting from
the quota/tariff-induced resource reallocation. Repeated interaction among firms can eliminate
wasteful rent- and revenue-seeking expenditures through cooperation. We show that while
aggregate outcomes are equivalent under tariffs and quotas if cooperation arises, the conditions
under which cooperation arises differ by policy. This difference arises because a firm must incur
additional cost to physically import and distribute the goods associated with additional quota
licenses, whereas there is no such cost when it comes to consuming additional tariff revenue.
Thus, quotas and tariffs are non-equivalent. We provide a simple sufficient condition under which
cooperative elimination of rent-seeking under quotas is easier than cooperative elimination of
revenue-seeking under tariffs and therefore a quota is the optimal policy whenever the optimal
policy admits cooperation.
Read more »
Revisiting the link between PAC contributions and lobbying expenditures, European Journal of Political Economy, 2015, 37, 86–101
A dataset that decomposes an interest group’s contributions to a Congressional representative across issues and decomposes an interest group’s issue–specific lobbying expenditures across Congressional representatives. Abstract
Unfortunately, data on campaign contributions of PACs (political action committees) in the US does not contain the PACs issues of concern. Additionally, while recent US lobbying data details the issues of concern for an interest group, it does not detail the Congressional representatives lobbied by the interest group. Using the 1997–98 Congressional cycle, earlier work showed PACs engaging in lobbying and campaign contributions account for the vast majority of such political money even though they represent a small minority of all PACs. Using an expanded time period, I show this is a systematic feature of the US political system and how it allows construction of a novel dataset that decomposes representative-specific contributions across issues as well as issue-specific lobbying expenditures across representatives. Further, I show this decomposition can qualitatively affect results regarding the relationship between political money and Congressional voting behavior on trade policy. Read more »
Contesting an International Trade Agreement, with Matt Cole (Cal Poly) and Ben Zissimos (U of Exter). Updated October 2018. R&R at Journal of International Economics.
SMU WP version (latest). CESifo WP version.
A new political economy framework that models conflicting lobbying interests and ratification uncertainty surrounding Trade Agreements and showcases novel international political externalities. Abstract
We develop a new theoretical framework of trade agreement (TA) formation, called a `parallel contest', that emphasizes the political fight over TA ratification within countries. TA ratification is inherently uncertain in each country, where anti- and pro-trade interest groups contest each other to influence their own governments' ratification decision. Unlike prior literature, the protection embodied in negotiated TA tariffs reflects a balance between the liberalizing force of lobbying and inherently protectionist government preferences. Moreover, new international political externalities emerge that are not internalized by governments that just internalize terms of trade externalities. Read more »
Good jobs, bad jobs: what's trade got to do with it?, with Dann Millimet (Southern Methodist University). Updated October 2018.
Routine biased technological change rather than Chinese import competition drives job polarization in US local labor markets. Abstract
We analyze whether local exposure to rising Chinese import penetration or routine-biased-technological-change (RBTC)
can explain the extent of job polarization experienced by US local labor markets between 1990 and 2010.
By defining jobs at a very disaggregate level, we have three main results. First, local RBTC exposure can explain job
polarization (i.e., lower employment growth of `middle-quality' jobs than `high-quality' and `low-quality' jobs) in US local
labor markets; local exposure to rising Chinese import competition, if anything, actually engenders an
anti-polarization effect. Second, local labor markets only experience job polarization when sufficiently exposed to
RBTC. Third, local exposure rather than (national) occupation-specific exposure drives the degree of job polarization.
This contrast has eluded prior studies conducted at the
local labor market level; our analysis, utilizing location-job pairs as the unit of observations, is the first study
to disentangle the impacts of local versus occupational exposure to shocks. Read more »
Heterogeneous job polarization in the US, with Dann Millimet (Southern Methodist University). Updated September 2015.
While job polarization characterizes US non-tradable and tradable service sectors, anti-job polarization characterizes the US tradable goods sector. Abstract
We investigate job polarization in the US. Significant heterogeneity is found
across sectors, with the tradable goods sector exhibiting anti-polarization.
This is consistent with the theoretical trade model of Grossman and Maggi
(2000). Read more »
Dynamic farsighted networks with endogenous opportunities of link formation. Updated July 2014.
The complete network may not obtain when endogenously determining which players form a link in a given period even though the complete network arises when pairs of players are randomly selected to form a link in each period. Abstract
I present a three player dynamic network theoretic model where players are farsighted and asymmetric. Unlike the previous literature that imposes an exogenous protocol governing the order of negotiations, I allow the identity of the players who form a link in a given period to depend endogenously on player characteristics. Importantly, I show how this can give different predictions regarding attainment of the complete network relative to models with an exogenous protocol. Regardless of whether the complete network is efficient, a key dynamic trade off drives whether the complete network is attained in my model. A pair of players (insiders) may form a link with each other but, even though link formation is always myopically bene.cial, each insider then refuses subsequent link formation with the third player (outsider) because the eventual attainment of the complete network makes each insider worse off relative to
the insider–outsider network. Read more »
WORK IN PROGRESS
Lobbying for tariff phaseouts in US bilateral Free Trade Agreements, with Shushanik Hakobyan (IMF) and Tristan Kohl (U of Groningen).
Structural transformation and labor mobility over the life cycle, with Masha Brussevich (IMF) and Mike Sposi (Dallas Fed).